Why Distinctive Customer
Targeting Is a Smart Strategy
When former NBA superstar
Magic Johnson was opening Starbucks coffee shops and a TGI Fridays restaurant
in Los Angeles in the 1990s, he made changes to the product offerings. “I had
to take the scones out of my Starbucks and put [in] sweet potato pie, pound
cake, sock-it-to-me cake, peach cobbler,” he
told attendees of the October 2015 Stanford University
Graduate School of Business “View from the Top” speaker series. “I was the
first Fridays in the nation to ever serve Dom Pérignon, Cristal, and all the
high-end liquors…. That’s what my customer base wanted.”
Here’s
what Andy Jassy, founder and current leader of Amazon Web Services (the Amazon
business that rents out computing power and data storage), told
the Financial Times about
how he built that business: “We were targeting developers and
startups who were not very well-served at the time [2003].” He went on to
explain that he designed AWS to be pay-as-you-go because his target customer
could not afford an expensive monthly subscription, which was then the standard
model.
These examples both illustrate an aspect of smart strategy that
companies often overlook: choosing a unique definition of their target customer
to gain a competitive edge or minimize head-to-head competition.
For example, AWS now
accounts for half of Amazon’s profits and is the company’s fastest-growing
revenue stream. This was hardly a sure thing when Jassy was asked to start the
business. As he told the FT, “If one of the old-guard technology
companies had built something like this and had been first to market, it would
have been much harder for us to come in later.” By 2010 every large IT company
— from IBM to Oracle to Google to Microsoft — had caught on. But Jassy had a
seven-year head start, in large part because he chose a target market that
allowed him to stay under the radar.
Likewise, Magic Johnson
chose to target minority neighborhoods that were underserved by popular chains.
As Johnson told his audience at Stanford, “We were short retail options. We
were driving an hour…outside our community to shop.” Southwest Airlines created
a distinctive growth path for itself by defining its target customer as bus and
car travellers priced out of air travel. Sir Brian Pitman, the former CEO of
Lloyds TSB, turned Lloyds from the U.K.’s banking laggard
to its leading bank by being the first retail
bank in the country to carve out “high net
worth” clients as a separate business and to drop large companies as a
target customer. When everyone else was focused on the wealthy few who could
afford an automobile in 1910, Henry Ford turned his company from an also-ran
into the industry leader (with more than 60 percent market share in 1921) by
focusing on making a car for the little guy.
Of course, sometimes strategy works in the other direction: You
choose your value proposition and let customers self-select. Consider
Starbucks. Howard Schultz built the company by offering high-quality espresso
and milk drinks in a comfortable setting that could serve as a “third place”
between office and home, and he invited anyone and everyone to join in. He
essentially let consumers decide for themselves whether they were his target
customer. Sam Walton did something similar with his Walmart superstores
strategy: He built massive, full-line warehouse stores with the lowest everyday
prices and let the customers roll in.
Sooner or later, though,
this approach to strategy will require sharper thinking about target customers
— as both Starbucks and Walmart learned. In the early 2000s, Starbucks
accelerated store openings and added a broader food menu, making it look, feel,
and smell increasingly like a fast-food joint. When McDonald’s and Dunkin’ Donuts then added premium (but affordable) coffee
drinks to their fast-food format, it
exposed Starbucks for its high prices and comparatively
mediocre food offerings. That’s when Starbucks had to think harder about its
true target customer. Schultz
temporarily eliminated menu options such as
breakfast sandwiches until the company figured out how to ensure their aroma didn’t
overpower the smell of coffee. He also banned automatic
expresso makers, and redesigned
stores to feel unique and sophisticated. It’s
worth mentioning that this was a bold choice, made in the immediate aftermath
of the 2008 financial crisis, when consumers had become
ultra-price-sensitive. But it worked, and today, Starbucks is as strong as
ever.
For a similar reason — chasing profit growth — Walmart created a
problem for itself in the late 2000s with its “win-place-show” policy. This
policy entailed stocking merchandise so that only the three leading brands in a
given product line would get shelf space. Because these were the brands most in
demand, the company believed, Walmart could get away with charging higher
prices and thus increase its margins (which were under pressure). But the
policy put the company into more direct competition with Target, which seeks
price-conscious affluent consumers — a somewhat higher-income demographic that
prides itself on finding good deals. In fact, the executive who instituted the
policy had previously worked at Target. But the new policy was a bust, and a
few years later he left Walmart. Well-defined thinking on customer targeting
would have helped him distinguish between smart strategy and plain ole
financial engineering.
The best strategies always include a sharp definition of the
target customer. And the more unique it is, the better. For example, if your
competitors define their target customers by where they are — say, in certain
parts of the world or in particular parts of town — you could instead define
them by one or more of the following:
The best strategies always include a sharp definition of the
target customer.
·
How they buy (perhaps through specific channels)
·
Who they are (their particular demographics and other innate
characteristics)
·
When they buy (for example, on particular occasions)
·
What they buy (are they price buyers or service hounds?)
·
For whom they buy (themselves, friends, family, their company, or
their customers).
The possibilities are infinite. They key is to distinguish your
strategy, and give your business a competitive edge.
Ken Favaro
http://www.strategy-business.com/blog/Why-Distinctive-Customer-Targeting-Is-a-Smart-Strategy?gko=279a1&utm_source=itw&utm_medium=20160929&utm_campaign=resp
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